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Knight's trouble began years ago

SAN FRANCISCO (MarketWatch) -- Knight Capital Group Inc.'s stunning trading glitch Wednesday has cast reasonable doubt on the company's future, but the truth is doubts have been trading for a while.

The Jersey City, N.J.-based market maker (KCG) on Thursday said it suffered a $440 million loss as part of a trading glitch that mispriced and sent bogus rapid-fire trades into the marketplace. See full story on Knight's disclosure of trading losses.

It's a significant blow. But unlike J.P. Morgan Chase & Co.'s (JPM) massive $5.8 billion "London whale" trade losses, Knight doesn't have the luxury of huge profits to cushion the blow.

Aggressive competition from upstarts has pressured the firm. Revenue has edged up to more than $1.3 billion last year from $1.15 billion in 2009, but profit has been essentially flat at $117 million, $91 million and $115 million between 2009 and 2011 respectively.

This year has been even worse. Knight lost $35.4 million in the Facebook Inc. (FB) initial public offering and is considering a lawsuit against the NASDAQ OMX Group(NDAQ) to recover some of its losses. .

The bottom line for Knight is that even if it recovers from these two significant trading debacles, how will it convince investors market-making of equities is a growth business in this environment, or that Knight is the firm that is poised to profit?

So far, they've been less than impressed. Knight shares have been mostly range bound between $12 and $18 for three years.

That's the glitch Knight has to solve if it survives.